Re Goldberg; Ex parte Law Society of New South Wales (1988) 82 ALR 271

Re Sarina; Ex parte Wollondilly Shire Council [1980] FCA 66; 30 ALR 266

Trojan v. Corporation of Town of Hindmarsh [1987] FCA 276; (1987) 82 ALR 255

Re Vella; Ex parte Seymour [1983] FCA 115; 48 ALR 420

Counsel for the Petitioning Creditor: D.McGovern with

A. O'Brien

Solicitors for the Petitioning Creditor: Gulley Helene Bullock

Scerri

Counsel for the Debtors: G. Sirtes

Solicitors for the Debtors: Mervyn J. Cathers and Co.

The Court orders that:

1. The petition be dismissed.

2. The debtors pay the petitioning creditor's costs of the petition

up to and including 19 March 1993.

3. The petitioning creditor pay the debtors' costs after 19 March

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BEAZLEY J This matter was heard by me on 22 June 1993, on which occasion I indicated to the parties that I was satisfied on the evidence as to the solvency of the debtors. Counsel indicated at that time that they did not require any detailed reasons in respect of that finding. There then remained two matters for determination: whether the petition should be dismissed or adjourned, and costs. I gave leave to the parties to make written submissions in respect of these issues.

2. The petitioning creditor has submitted first, that notwithstanding that the judgment debt upon which the bankruptcy notice was based has been set aside, an act of bankruptcy has been committed, namely, a failure to comply with the bankruptcy notice which remains available as the basis for the making of a sequestration order: (Re Vella; ex parte Seymour [1983] FCA 115; 48 ALR 420); and secondly, that in any event, at the hearing of a petition the creditor is entitled to prove, independently of any judgment, that there is a debt which is owed by the debtor. If satisfied of that fact and the other matters referred to in s.52(1) of the Bankruptcy Act 1966, the court may make a sequestration order against the estate of the debtors: (Re Goldberg; Ex parte Law Society of New South Wales (1988) 82 ALR 271 at 276).

3. During the course of the hearing, counsel for the petitioning creditor sought to prove the existence of a debt and filed in court a number of affidavits in support of that claim. Those affidavits were only served upon the debtors during the course of the day on 22 June 1993, and in some instances, during the course of the hearing before me.

4. Although the petitioning creditor is correct in submitting that it is entitled to pursue in this court the question of whether a debt exists, I do not consider that this court should be engaged in the determination of that issue in circumstances where the petitioning creditor has commenced proceedings in another court, in this case the Local Court at Windsor, to recover the same debt which involves an amount of just over $7,000. Had I considered that it was appropriate for the petitioning creditor to prove the debt in this court I would have granted an adjournment to the debtors to allow them to reply to those affidavits filed in court during the course of the hearing.

5. The debtors rely upon two grounds in their opposition to the petition: first as judgment has been set aside, the petition should be dismissed, and secondly on the ground of solvency. As to the second of these grounds the petitioning creditor submits that the debtors did not comply with r.20 of the Bankruptcy Rules in that the notice of intention to oppose the petition did not include that ground and that the question of solvency only arose during the course of the hearing on 22 June 1993. The debtors dispute this assertion by referring to the action which they took in late May 1992, which was notified to the petitioning creditor's solicitors, of placing an amount of $7,000 into their own solicitors' trust account, submitting that this impliedly raised the issue of solvency. The petitioning creditor's submission that the debtors did not comply with r.20 is correct. Notwithstanding that this was so, I gave leave to the debtors to adduce evidence of solvency, and as I have said, I was satisfied on that issue.

6. Both parties accept that the court has a discretion as to whether to make a sequestration order where solvency has been proved. (s.52(2) of the Bankruptcy Act 1966; Re Sarina; Ex parte Wollondilly Shire Council [1980] FCA 66; 30 ALR 266; Trojan v. Corporation of Town of Hindmarsh [1987] FCA 276; (1987) 82 ALR 255). I consider that the debtors' action in depositing moneys into their solicitors' trust account was intended to demonstrate to the petitioning creditor that the debt allegedly owing to it would be paid if the petitioning creditor was successful in its action against them. The setting aside of this fund, in my opinion, is a significant factor to be taken into account in the exercise of my discretion. I have been advised by counsel that there is now an arrangement between the parties that this fund will be held in trust pending the resolution of the petitioning creditor's claim and made available to the petitioning creditor should it ultimately be successful in its claim. Prior to this arrangement, which was made after the conclusion of the hearing on 22 June 1993, the petitioning creditor says that it could not have been satisfied that the debtors' intention was for these moneys to be available for the payment of the debt, if proved, and that it would always have been open to the debtors to withdraw those moneys without notice to the petitioning creditor. I consider the petitioning creditor's stance in this regard to be unduly technical. The simple expediency of the petitioning creditor's solicitors writing to the judgment debtors' solicitors to clarify the matter would have satisfied any concerns there might have been as to the debtors' intention. This was not done.

7. In these circumstances, where the judgment upon which the bankruptcy notice was based has been set aside, the petitioning creditor is effectively secured should it be able to prove its claim against the debtors, and the debtors are solvent, I consider the petition should be dismissed.

8. That leaves the question of costs. Both parties seek an order for costs in their favour. One of the grounds upon which the judgment debt was set aside was that the debtors had not been served with the initiating summons. This leaves one to wonder how default judgment was obtained, as it would have been a prerequisite to the entry of judgment that service be proved. In the course of the hearing of this matter it seemed to me that one of the affidavits filed in this matter was sworn in circumstances where the necessary search may not have been made in the Registry. I raise this only as a concern as the deponent to the affidavit was not present in court to provide an explanation as to the source of the information which was deposed to in the affidavit. The question which I have to determine therefore is whether the petitioning creditor should have its costs of the petition in circumstances where the bankruptcy notice was based on a judgment debt where the judgment should not have been obtained, and in circumstances where the debtors have succeeded on a ground which was not raised until the date of the hearing. I consider the answer to the costs question lies in the actions which have been taken by the parties in relation to the Local Court and Bankruptcy proceedings. Mr. Hardaker gave evidence that when he found out about the judgment, he gave instructions to his solicitor to have the judgment set aside. However, the solicitor failed to do so. Thereafter, a bankruptcy notice issued. Negotiations were then entered into between the parties which were unsuccessful. However, during the course of this time, the debtors failed to have the bankruptcy notice stayed, pending the outcome of those discussions. It was not until after service of the creditor's petition that they took any steps to have judgment set aside. That occurred on 19 March 1993. I consider that in those circumstances the petitioning creditor should have its costs up to and including 19 March 1993.

9. The next question is whether the petitioning creditor should have its costs thereafter. The debtors rely upon the facts that the judgment was set aside, that moneys were paid into their solicitors' trust account, and that the creditor sought an adjournment of the petition, on at least one occasion, after orders had been made for the filing of affidavits, which order was not complied with by the creditor, to enable the creditor to give consideration to whether it wished to proceed to prove the debt in the Local Court or the Federal Court. Costs were reserved on that occasion. When the matter came before the court on 22 June 1993, as I have already said, the petitioning creditor sought to prove its debt, but only filed and served its affidavits that day. In any event, I have formed the view that it would not have been appropriate for the petitioning creditor to prove its debt in this court. In all the circumstances, including the inappropriateness of proceeding in the Federal Court to prove a claim in debt such as is claimed here, I consider that the petitioning creditor should pay the debtors' costs after 19 March 1993.

10. Accordingly, the orders which I make are as follows:

1. The petition is dismissed.

2. The debtors are to pay the petitioning creditor's costs of the

petition up to and including 19 March 1993.

3. The petitioning creditor is to pay the debtors' costs after 19

March 1993.